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April 16, 2012

Euro Falls on Spanish Debt Worries

Hits lowest level in two years against pound

The euro fell against its peers for the second day in a row on Monday in advance of planned Spanish debt sales, and fell below $1.30 for the first time in two months in morning trading. It also dropped to its lowest level in two years against the British pound.

Bloomberg reported Monday that Spain planned sales of bonds and bills during the upcoming week, and concerns over its debt drove the joint currency lower. It did not help nervous investors that Spain’s deputy economy minister called last week for the European Central Bank (ECB) to do more to contain the debt crisis by buying more bonds.

The economy minister, Jaime Garcia-Legaz, said that the ECB should “step up purchases of bonds” after Prime Minister Mariano Rajoy refused to meet the deficit targets set by the predecessor Spanish government at the behest of the European Commission (EC). Rajoy is still endeavoring to convince investors that he can contain the Spanish economic crisis.

The euro fell against 12 of its 16 major currency counterparts, including the yen, in the wake of Garcia-Legaz’s comments. At the same time, Spanish bond yields for 10-year instruments rose as much as 18 basis points. Five-year credit default swaps (CDS) set a new record in advance of an auction for Spanish 12- and 18-month bills set for Tuesday.

“The euro is under a bit of pressure with the periphery in focus, particularly as we have some Spanish issuance this week,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in the report. “The path of least resistance is still lower, and we’re probably looking for euro-yen to lead the way in that regard.”

In the last year the euro has lost 6.1%, while the yen has gained 6.7%, making its best gains against higher-yielding currencies like the New Zealand dollar and Swedish krona.

“There seems to be renewed fear that the euro zone crisis has taken a turn for the worse,” Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore, was quoted saying. “Stock indexes are all in the red, so that shows that there’s risk aversion at the moment. The interest is to buy back the yen.”